Banking.The modern system of banking had its origin in Venice about the close of the 12th century, though it was not until 400 years later that the "Banco di Rialto" was authorized by the acts of the Venetian senate in 1584 and 1587. Toward the close of the 17th century the Bank of England was founded and from that time the custom of using banks as places of deposit for money and valuables, or for the purpose of facilitating exchanges, spread rapidly over the civilized countries of the globe. On May 26, 1781, the Continental Congress passed an act authorizing the Bank of North America. By the provisions of this act Robert Morris was given the power to establish a bank with a capital of $400,000, but before it was placed in good working order the independence of the United States became a reality and conditions were so changed that the bank was never made a permanent institution.
In the formation of the Federal government, it was Alexander Hamilton's idea that there should be a national bank of issue, and in harmony with this idea the first Bank of the United States was incorporated in 1791 with an authorized capital of $10,000,000. Its charter expired in 1811, and the financial condition of the country in consequence of the war of 1812 led to the chartering of the second United States bank in April, 1816, with a capital of $35,000,000. It soon found rivals in the state banks, and for the next 40 years the banking system of this country was a motley patchwork of national, state and private institutions. Each state has its own banking lawssome lax and some stringent; counterfeiting was easy, and bank failures were common occurrences.
In 1838 what is known as, the "free banking system" was inaugurated in New York. It allowed any association of persons to issue notes on state bonds, or other public securities. This system spread to other states and continued in operation until the Civil war. It was during the free banking period that the "Wild Cat" banks sprang up like mushrooms all over the country.
Early in the Civil war, in order to create a market for bonds issued by the United States government, Salmon P. Chase, President Lincoln's secretary of the treasury, devised the plan of giving special privileges to banks organized under a Federal charter. This led to the act of Congress, approved Feb. 25, 1863, authorizing national banks, which act was the beginning of the present national banking system. However, the state banks still held their own, and the national banks did not make much headway until after the passage of the act providing for a ten per cent, tax on state bank notes in circulation after July 1, 1866, which practically put an end to state banks of issue.
The first bank in Kansas was a private concern started by C. B. Bailey at the corner of Second and Delaware streets in the city of Leavenworth in 1856. It did not live long and was succeeded by Isett, Brewster & Co., who came from Des Moines. This firm was in turn succeeded by Scott, Kerr & Co. in 1859. These were all private banks, operating without a charter from the territorial authorities, or without sanction of law.
No banking laws were passed by the first territorial legislature, but by the act of Feb. 19, 1857, the Kansas Valley bank was incorporated with a capital stock of $800,000. William H. Russell, A. J. Isaacs, William F. Dyer, James M. Lyle and F. J. Marshall were designated to open books for stock subscriptions within six months and keep open for 30 days unless the full amount of stock should sooner be subscribed. If within the 30 days 500 shares of $100 each were taken, the stockholders were authorized to organize the bank, which was to be governed by a president and seven directors, elected for one year. But the bank was not to issue paper money until at least 50 per cent. of the stock subscribed should be paid in, in specie, and bills or notes issued should never exceed 200 per cent. above the amount of capital stock actually paid inthat is, for every $3 in paper the bank should hold $1 in gold or silver. Five branches were to be establishedat Atchison, Doniphan, Lecompton, Fort Scott and Shawnee in Johnson county. Five commissioners were to be appointed annually by the legislature to examine into the conditions of the bank and the several branches, as well as any other banks that might be established in the territory. If at any time the bank should fail to redeem its notes, any judge in the territory, upon proper complaint, might issue an injunction to restrain the bank from transacting any further business.
Under date of July 14, 1857, J. C. Walker wrote to Gov. Walker, inclosing a "transcript of the record of the Kansas Valley Bank branch at Atchison," showing that 50 per cent. of the capital stock assigned to that branch had been paid in, and that the bank was ready to issue paper money whenever the governor was satisfied that the projectors of the bank had complied with the provisions of the law. The governor appointed L. S. Boling to make the examination, and upon his report Gov. Denver issued a proclamation on Feb. 18, 1858, authorizing the Atchison branch to begin business in accordance with the terms of its charter. When the act of incorporation of the Kansas Valley Bank was repealed on Feb. 3, 1858, the Atchison branch, with S. C. Pomeroy as president, was exempted from the provisions of the act of repeal. In Jan., 1861, the name of the institution was changed to the "Bank of the State of Kansas," William H. Russell, president, and it continued under that name until 1866, when it retired from business, being succeeded by Hetherington's Exchange Bank (now the Exchange National), which was organized in 1859. It became a national bank on Aug. 1, 1882.
Three banks were incorporated by the act of Feb. 11, 1858, viz: the Lawrence Bank, the Bank of Leavenworth, and the Bank of Wyandott. The incorporators of the Lawrence bank were Robert Morrow, S. W. Eldridge, S. B. Prentiss, James Blood and H. Shanklin. Those of the Bank of Leavenworth were Henry J. Adams, John Kerr, Samuel Harsh, Henry Foote and I. W. Morris. The Wyandott bank incorporators were William Y. Roberts, J. M. Winchell, Thomas B. Eldridge, J. S. Emery and James D. Chestnut. The authorized capital of each bank was $100,000, which was to be divided into shares of $100 each, and the affairs of each bank were to be managed by a board of eight directors. Section 12 of the act provided that, "Whenever the directors of either bank shall deposit with the comptroller an amount of the state bonds of any interest paying state in the Union, or of the United States, equal in value to $25,000, at the current rates of the New York Stock Exchange, and shall satisfy said officer that they have on hand $2,500 in specie, for the purpose of redeeming notes of the bank, then the comptroller shall countersign $25,000 of said circulating notes and return them to the president for use; and it shall then be lawful for said bank to use said notes as currency," etc.
On Feb. 7, 1859, the legislature passed an act authorizing the establishment of savings banks, and under its provisions James Blood, B. W. Woodward, S. B. Prentiss, C. W. Babcock, George Ford, C. H. Branscomb, George W. Deitzler and others organized the Lawrence Savings Bank.
But before any of the banks organized under the territorial lawsexcept, possibly, the one at Atchisoncould place themselves upon a firm financial footing, Kansas was admitted into the Union as a state, and while this fact did not alter the legal standing of the banking institutions authorized during the territorial regime, it did alter materially the conditions under which other banks could be established. The Wyandotte constitution contained a provision that no bank should be established except under a general banking law, and that no banking law should be in force until after it had been submitted to a vote of the electors of the state at some general election and approved by a majority of the votes cast at such election. The first state legislature, which met in March, 1861, passed a general banking law providing that,
"Whenever any person or association of persons, formed for the purpose of banking under the provisions of this act, shall duly assign or transfer, in trust, to the auditor of this state, any portion of the public stock issued, or to be issued, by the United States, or the stocks of the State of Kansas, said stocks to be valued at a rate to be estimated and governed by the average rate at which such stocks are sold in the city of New York, at the time when such stocks may be left on deposit with the auditor of state, such person or association of persons shall be entitled to receive from the auditor an amount of circulating notes of different denominations, registered and countersigned, equal to and not exceeding the amount of public stocks assigned and transferred as aforesaid," etc.
The law further provided that before receiving such notes the stockholders should give to the auditor a "good and sufficient bond, to be approved by him, to the amount of one-fourth of the notes that said bank shall receive," and they were also required to file with the auditor a certificate, duly attested by the president and cashier of the proposed bank, that ten per cent. of the capital stock of the bank has been paid in specie and on deposit, to remain in the vaults of the bank as an additional security to indemnify the holders of the bank's notes against loss in case of the depreciation of the securities deposited with the auditor to secure the circulation of the bank.
No bank could be organized with a capital stock less than $25,000, which might be increased, and every bank was required to publish annual statements showing its condition. In the event a bank should fail to redeem its notes on demand, they might protested, and if not paid in twenty days the auditor of state was authorized to give notice that they would be paid out of the trust funds. Note holders were given the power to recover damages from the bank. This law was submitted to the people of the state at the election on Nov. 5, 1861, and was ratified by a vote of 4,655 to 2,807. Before it could be fairly tested Congress passed the national banking law, and the banks of Kansas were confined to institutions of discount and deposit.
Boyle, in his "Financial History of Kansas," divides the banking history of the state into three periods. The first, which he styles the "unregulated," was from 1861 to 1891; the second, or period of "loose supervision," was from 1891 to 1897, and since the latter date there has been a period of "state supervision." It was in the first period that the question of the state's right to authorize banks of discount and deposit was carried to the supreme court. At the July term in 1878, Judge Brewer, afterward associate justice of the United States supreme court, handed down an opinion in the case of Pape vs the Capital Bank of Topeka (20th Kan. p. 440), in which he held that the constitutional provision applies only to banks of issue, and does not prohibit the legislature from creating banks of discount and deposit. Said he: "All banks, that is, all banks within the scope of the article, are required to keep offices and officers for the issue and redemption of their circulation. But a bank of deposit purely has no circulation. It is not a bank, therefore, within the scope of the article." All the other justices of the supreme court concurred in this opinion.
Notwithstanding the fact that Boyle classifies the banks during the first 30 years of statehood as "unregulated," some very stringent laws relating to banking were passed in that time. The act of March 12, 1879, made it "unlawful for any president, director, manager, cashier or other officer of any banking institution, to assent to the reception of deposits or the creation of debts by such banking institution, after he shall have had knowledge of the fact that it is insolvent or in failing circumstances."
The act also made it the duty of every officer, director, agent or manager of any banking institution to examine into the affairs of the same and, if possible, know its condition. Another act of the same date provided that any officer of a bank receiving deposits or assenting to the creation of debts, when such bank should be in an insolvent condition, should be deemed guilty of larceny and "punished in the same manner and to the same extent as is provided by law for stealing the same amount of money deposited, or other valuable thing, if loss occur by reason of such deposit."
Although laws of this character were enacted at various times, it seems there was no general banking law in force. Gov. Humphrey, in his message to the legislature of 1889, said: "We have no law regulating the important subject of banks and banking. Banks of discount and deposit are referred to, as banks of issue are forbidden by the constitution, except by a vote of the people. Even the general corporation law does not include banking as one of the many purposes for which corporations may be formed, and the only provision on the subject is article 16, chapter 23, General Statutes, being an act of six sections for the organization and incorporation of savings associations. The right to incorporate banks under this act for the purpose of carrying on a general banking business has been questioned, and even the constitutionality of the act assailed in case of Pape vs. Capitol Bank, 20 K. 440.
"Notwithstanding this, hundreds of banks over the state have been thus organized and incorporated, not as savings banks, in fact, but to carry on a general business. . . . In justice to those who desire to form banking corporations, there should be some adequate provision of law for that purpose; and in justice to them, as well as to the business public, there should be an act regulating the subject of banks and banking generally, with some power of examination, inspection and supervision, which might be lodged with a bank commissioner, or with the present superintendent of insurance."
Nothing was done at that session, but in 1891 the legislature passed a general banking law which may be said to mark the renaissance of Kansas banking. One of the principal provisions of this act was the creation of the office of bank commissioner (q. v.). Six years later the law of 1891 was supplanted by one much more elaborate and comprehensive. It was an act of 65 sections, the principal provisions of which were as follows: Five or more persons were given power to form a corporation to conduct a banking business; no two banks in the state should be permitted to operate under the same name; the building owned by the bank as a place of business should not equal in value more than one-third of the capital stock; banks organized prior to the passage of the act should conform to its provisions; stockholders were to be liable for a sum equal to the par value of their holdings; receiving deposits when a bank was in an insolvent condition rendered the officers subject to a fine of not exceeding $5,000 or imprisonment in the penitentiary from one to five years, or both; no bank was to be permitted to do business without authority, and the bank commissioner was to take charge of insolvent banks.
This act was amended by the acts of 1901 and 1903. The former placed trust companies under the banking laws of the state, especially the provisions relating to the impairment of capital and insolvency, and the latter provided that no bank should be estatblished[sic] with a capital of less than $10,000. The act of 1903 also provided that every officer of an incorporated bank should hold at least $500 in stock of the institution, which stock should not be sold or transferred while holding such office.
Doubtless the most radical and far-reaching law on the subject of banking ever passed by the Kansas legislature was the act of March 6, 1909, "providing for the security of depositors in the incorporated banks of the state, creating the bank depositors' guaranty fund of the State of Kansas, and providing regulations therefor, and penalties for the violation thereof."
The principal features of the law were: 1Any incorporated state bank with a paid-up surplus equal to one-tenth of its capital might participate in the benefits of the guaranty fund, and the bank commissioner was authorized to issue a certificate to that effect. 2Before such certificate should be issued the bank was required to deposit with the state treasurer, for each $100,000 of deposits, or fraction thereof, $500 in bonds of the United States, the State of Kansas, or some minor political division of the state, and in addition pay a sum equal to one-twentieth of one per cent, of the average deposits, etc. 3When any bank should be found to be insolvent the bank commissioner to take charge, issue to the depositors a certificate bearing interest at the rate of six per cent. per annum, and if the bank's assets should prove insufficient to pay the depositors, then the certificates should be redeemed from the guaranty fund, 6National banks by reorganizing might become guaranty banks. 7Any bank guaranteed under the provisions of the act, that should receive deposits continuously for six months in excess of ten times its capital and surplus, should be deemed guilty of violating the law and forfeit it guaranty rights and privileges.
Soon after the passage of the law opposition on the part of the national banks of the state developed, because it was feared that the guaranty of deposits in the state banks would give those institutions an undue advantage., Gov. Stubbs, Bank Commissioner Dolley, and Attorney-General Jackson went to Washington to confer with the United States attorney-general, and some national banks went also to present their side of the case. Attorney-General Wickersham upheld the law, and when it became apparent that it was the intention of the opponents of the law to bring an action in the Federal court, the state forestalled the movement early in Aug., 1909, by instituting proceedings to enjoin certain persons and bankers from interfering in any way with the enforcement of the law. At the same time the attorney-general asked the supreme court for a writ of mandamus to make it necessary for the bank commissioner and the state treasurer to carry out the provisions of the law. The question, however, was finally carried to the supreme court of the United States, which upheld the law, and the state banks of Kansas were thus placed upon a basis of security surpassed by no state in the Union.
As a rule, the banks of Kansas have been conducted along conservative lines, and failures have been neither numerous nor of serious consequence. The state officials have not been remiss in the discharge of their duties, and even before the passage of the guaranty law did all in their power to safeguard the interests of the depositors. Since the passage of that law confidence in the state banks has been strengthened, but the officials have not diminished their efforts to place the banking institutions upon a still higher financial level. An instance of this is seen in the decision of Attorney-General Jackson in June, 1910, in the case of the Citizens & Farmers' State bank of Arkansas City. This bank was closed in Nov., 1908, by the bank commissioner, on account of an indebtedness of $75,000 owed to it by the Wells Produce company of that city. The produce company failed soon after, and the receiver of the bank discovered that instead of $75,000, its indebtedness to the bank was about $100,000. When the question of the liability of the directors to the depositors was submitted to the attorney-general he held that the officers and directors of the bank were liable to the depositors for their losses, aggregating some $400,000. Said Mr. Jackson:
"It is a general rule of law that ignorance of any fact in the bank's affairs, which it is the duty of the directors to know, can never be set up by them in defense of any of their official acts. The directors cannot escape liability by pleading ignorance of the facts which they agreed with the bank, by accepting their officers, to ascertain. They must be held to know all facts which ordinary diligence in the examination of the affairs of the banks would have disclosed."
Concerning this decision of Mr. Jackson the Topeka Capital of June 25, 1910, said: "This rule, laid down by the attorney-general, no doubt will make a whole lot of bank directors wake up. Heretofore the position of bank director has been generally looked upon as an honorary one, but bank directors will now realize that the position has considerable responsibility and liability attached to it."
Some idea of the growth of the banking business in Kansas may be gained by a comparison of the bank commissioners' comparative statements for Sept. 1, 1900, and Aug. 15, 1910. On the former date there were 388 state banks reporting, with loans and discounts amounting to $21,812,835.56; capital stock, $6,613,000; surplus and undivided profits, $1,839,663.14; deposits, $26,899,875.45. On Aug. 15, 1910, there were 860 banks reporting loans and discounts of $80,757,016.35; capital stock, $16,779,300; surplus and undivided profits, $7,041,291.29; deposits, $77,733,500.33.
According to the Bankers' Directory of Jan. 1, 1911, there were in the state at that time 200 national banks with an aggregate capital stock of $11,109,000; a surplus of $6,221,050, and deposits of $76,571,300.Pages 136-143 from volume I of Kansas: a cyclopedia of state history, embracing events, institutions, industries, counties, cities, towns, prominent persons, etc. ... / with a supplementary volume devoted to selected personal history and reminiscence. Standard Pub. Co. Chicago : 1912. 3 v. in 4. : front., ill., ports.; 28 cm. Vols. I-II edited by Frank W. Blackmar. Transcribed May 2002 by Carolyn Ward.
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